No sparks of recovery seen for short-circuited industry

"No one has figured out a business model to make money [using the new network technology]," said Raul Katz, vice president at the Booz Allen Hamilton technology consultancy. "But they will."

Katz predicts that by the end of 2004 many telecom executives will conclude they will not get anywhere by "just grinding it out" under current conditions of super competition and will either sell their companies or buy other firms. Major industry consolidation will occur in 2005 and 2006, he predicts.

As the industry struggles to sort itself out next year, consumers will be wooed with new features, said Martin Dunsby, a vice president with inCode, a San Diego telecom consultancy.

"Concepts like local or long-distance service will go away," he said. "Customers will be offered a lot of voice or data services and won't care whether it comes over a DSL phone line or a cable modem. The geeks in the back office can worry about that. Prices will go lower and new services will proliferate."

But as they put on a happy marketing face to the public, telecom executives will scramble to reinvent their business.

A new analysis reinforces the notion that things are unlikely to improve on their own, even if the general economy manages a recovery. Traditional companies will continue to lose customers using voice lines, according to projections by Technology Futures Inc., based in Austin, Texas.

The study, sponsored by a consortium of Canadian and U.S. telecom carriers, notes that incumbent local carriers operated more than 181 million lines in 1999, a figure that had fallen to fewer than 163 million by the end of 2002. The report projects a further fall to about 100 million lines 10 years hence.

Lawrence K. Vanston, a co-author of the analysis, said that it is vital that phone companies replace their current copper networks with high-capacity fiber that runs to their customers' premises or close to them.

"The handwriting on the wall is clear," he said. "You either make this investment, or you get out of the wireline business."

While it is difficult for a company with declining business to reinvent itself and build new infrastructure, the cable television operators recently did just that, Vanston said. And they are not as financially robust as the big telcoms.

Even so, pouring billions of dollars into new fiber networks, as most big telcoms have vowed to do, is still a huge gamble.

"I have never seen a business case for putting fiber close to the house and make money," said Katz of Booz Allen Hamilton. "It's just too expensive."

This is the seventh in a series of articles looking at what lies ahead for various industries next year.

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Read previous installments in the Outlook 2004 series at chicagotribune.com/outlook